Vertical Fiscal Imbalance

6 Sep 2024

The role of the 16th Finance Commission should be to eliminate vertical fiscal imbalance in federal relations.

  • The 16th Finance Commission of India was constituted on December 31, 2023, with Dr. Arvind Panagariya as its Chairman.

About Vertical Fiscal Imbalance

Vertical Fiscal Imbalance

  • About: Vertical fiscal imbalance refers to a situation in a federal system where there is a mismatch between the revenue-raising powers and expenditure responsibilities of different levels of government. 
  • Expenditure Data: As the 15th Finance Commission, states incur 61% of the revenue expenditure but collect only 38% of the revenue receipts.
    • Dependency: Ability of the States to incur expenditures is dependent on transfers from the Union government.
  • Calculating VFI in India: VFI = ORR/ORE
    • ORR is the sum of the Own Revenue Receipts and the tax devolution from the Union government for all States. 
    • ORE is the Own Revenue Expenditure  for all States.
  • If this ratio is less than 1: It implies that the sum of own revenue receipts and tax devolution of the States is inadequate to meet the ORE of the States

Enroll now for UPSC Online Course

Agenda For The 16th Finance Commission

Focus Areas

Description

Finance Devolution For Cities
  • Contribution of Indian Cities: Cities contribute around 66% of India’s GDP and about 90% of total government revenues and thus, are an important spatial zone for the overall development of India. 
  • Concerns:
    • Inadequate Infrastructure: India’s economic scale is insufficient to meet rising needs. 
      • The World Bank estimates that $840 billion is needed for basic urban infrastructure in the next decade.
    • Inadequate Devolution: Despite the efforts of five commissions since the 11th Finance Commission, financial devolution to cities remains inadequate. 
    • Impact on Development: Rapid urbanisation without appropriate fiscal action has adverse effects on development. 
      • The fiscal health of municipalities is poor, affecting both city productivity and quality of life. 
About the Taxation System
  • Impact of Goods and Service Tax (GST): It has reduced ULBs’ tax revenue (excluding property tax) from about 23% in 2012-13 to around 9% in 2017-18. 
  • Intergovernmental transfers (IGTs) to Urban Local Bodies (ULBs): In India, they are about 0.5% of GDP, much lower than the 2-5% typical of other developing nations. 
      • Example: South Africa allocates 2.6%, Mexico 1.6%, the Philippines 2.5%, and Brazil 5.1% of their GDPs to their cities. 
    • IGTs from States to ULBs are very low, with State Finance Commissions recommending only about 7% of States’ own revenue in 2018-19. 
  • Concerns: 
    • Persistency of Issues: Although IGTs make up about 40% of ULBs’ total revenue, issues persist regarding their predictability, earmarking for vulnerable groups, and horizontal equity. 
    • Parallel Agencies: The 13th Finance Commission observed that “parallel agencies and bodies are emasculating local governments both financially and operationally.” 
      • Example: Programs like the Member of Parliament Local Area Development Scheme and the Member of Legislative Assembly Local Area Development Scheme exacerbate this issue, distorting the federal structure.
  • Need For: IGTs are crucial for ULBs, given their financial state and the need for stable support until their own revenues improve. 
    • Increasing the quantum of IGTs as a percentage of GDP is necessary. 
Census and Data
  • Concern: 
    • Reliance on Older Data: In the absence of the 2021 Census, reliance on 2011 data is inadequate for evidence-based fiscal devolution
  • Need For: India’s town figures must be captured by the 16th FC, including the significant migration to Tier-2 and 3 cities.
    • India has approximately 4,000 statutory towns and an equal number of Census towns, with an estimated 23,000 villages, all of which are effectively

 

Check Out UPSC CSE Books From PW Store

Must Read
UPSC Daily Editorials UPSC Daily Current Affairs
Check Out UPSC NCERT Textbooks From PW Store Check Out UPSC Modules From PW Store 
Check Out Previous Years Papers From PW Store UPSC Test Series 2024
Daily Current Affairs Quiz Daily Main Answer Writing
Check Out UPSC CSE Books From PW Store

 

Archive Calendar

Mon Tue Wed Thu Fri Sat Sun
 123
45678910
11121314151617
18192021222324
25262728293031

Need help preparing for UPSC or State PSCs?

Connect with our experts to get free counselling & start preparing

Know about Physics Wallah

Physics Wallah is an Indian online education platform, that provides accessible & comprehensive learning experiences to students of classes 6 to 12 and those preparing for JEE and NEET exams. We also provide extensive NCERT solutions, sample papers, NEET, JEE Mains, BITSAT previous year papers, which makes us a one-stop solution for all resources. Physics Wallah also caters to over 3.5 million registered students and over 78 lakh+ Youtube subscribers with 4.8 rating on its app.

We Stand Out because

We successfully provide students with intensive courses by India's qualified & experienced faculties. PW strives to make the learning experience comprehensive and accessible for students of all sections of society. We believe in empowering every single student who couldn't dream of a good career in engineering and medical field earlier.

Our Key Focus Areas

Physics Wallah’s main focus is to create accessible learning experiences for students all over India. With courses like Lakshya, Udaan, Arjuna & many others, we have been able to provide a ready solution for lakhs of aspirants. From providing Chemistry, Maths, Physics formulae to giving e-books of eminent authors, PW aims to provide reliable solutions for student prep.

What Makes Us Different

Physics Wallah strives to develop a comprehensive pedagogical structure for students, where they get a state-of-the-art learning experience with study material and resources. Apart from catering students preparing for JEE Mains and NEET, PW also provides study material for each state board like Uttar Pradesh, Bihar, and others.

Aiming for UPSC?

Download Our App

# #
Quick Revise Now !
AVAILABLE FOR DOWNLOAD SOON
UDAAN PRELIMS WALLAH
Comprehensive coverage with a concise format
Integration of PYQ within the booklet
Designed as per recent trends of Prelims questions
हिंदी में भी उपलब्ध
Quick Revise Now !
UDAAN PRELIMS WALLAH
Comprehensive coverage with a concise format
Integration of PYQ within the booklet
Designed as per recent trends of Prelims questions
हिंदी में भी उपलब्ध

<div class="new-fform">






    </div>

    Subscribe our Newsletter
    Sign up now for our exclusive newsletter and be the first to know about our latest Initiatives, Quality Content, and much more.
    *Promise! We won't spam you.
    Yes! I want to Subscribe.